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ISAS Working Paper No. 14 – Date: 4 October 2006 (All rights reserved) Institute of South Asian Studies Hon Sui Sen Memorial Library Building 1 Hon Sui Sen Drive (117588) Tel: 68746179 Fax: 67767505 Email: [email protected] Wesbite: www.isas.nus.edu.sg
DESTINATION INDIA FOR THE PHARMACEUTICAL INDUSTRY
Dr Alka Chadha•
This paper was published in the Delhi Business Review, Vol. 7, No. 1 (January - June 2006), pp 1-8.
Introduction
The drugs and pharmaceutical industry has an important place in the Indian economy due to
its positive technological spillovers to other sectors of the economy. The industry grew at 7.2
percent and contributed 1.3 percent to the gross domestic product in 2004. It recorded US$4
billion in domestic sales (about 1.5 percent of the global pharmaceutical sales) and over
US$3 billion in exports in 2003-04 (Government of India, Economic Survey, 2004-05). Thus,
the pharmaceutical industry is a sun-rise industry with vast opportunities for both the
domestic and foreign players. With the changes in the regulatory environment regarding
patent laws, the spotlight is now on India for contract research, joint ventures and alliances.
• Dr Alka Chadha is a Research Associate at the Institute of South Asian Studies (ISAS), an autonomous
research institute within the National University of Singapore. She can be contacted at [email protected].
Overview of India’s Pharmaceutical Industry
The Indian pharmaceutical industry is highly fragmented with over 23,000 units and only
around 250 of them are in the organized sector. The industry has been characterized by tight
price controls as well as weak patent laws. While price regulation has restricted profitability,
weak patent laws have facilitated growth in the industry. In fact, the industry has been
competing on its capability of reverse-engineering1 patented products that are produced by
foreign companies and then selling them at lower prices. However, this option will no longer
be available to them since India has to recognize both the product and the process patents
under the World Trade Organization (WTO) regime and the industry will have to boost its in-
house R&D and develop original molecules along with developing generic drugs. The Indian
pharmaceutical industry produces bulk drugs belonging to all major therapeutic groups. Bulk
drugs are the key acting ingredients with medicinal properties that form the basic raw
materials for formulations2 and account for roughly one-fifth of the industry output while
formulations account for the rest. Some pharmaceutical firms are tapping the low-cost low-
risk and medium returns overseas generics markets and also undertaking various initiatives
for new chemical entities and novel drug delivery systems that are improvements on the
available drugs like lower side-effects or easier dosage forms.
The government has controlled pharmaceutical prices since 1970 under the Drug Price
Control Order (DPCO), 1970 to make available essential drugs at affordable prices. Due to
complaints from the pharmaceutical companies regarding regulation of prices, now the
National Pharmaceutical Pricing Authority is responsible for monitoring prices. The National
Drug Authority has been set up to ensure quality consciousness and to check the proliferation
1 Reverse-engineering is a method of using the functional aspects and underlying ideas of a product to develop
a similar or identical product. 2 Bulk drugs are the active chemical ingredients used to manufacture formulations or finished products.
2
of substandard drugs. Moreover, the government in recognition of the pharmaceutical
industry as a knowledge-based industry, has extended the facility of availing 125 percent
weighted tax deduction for research and development (R&D) up to March 31, 2005. This is
in addition to new drugs being exempted from DPCO for 10 years.
TRIPs Regulations
The most important governmental intervention in the pharmaceutical industry relates to the
amendment of the Patent Act 1970. The 1970 Act had abolished product patents, reduced the
patent term and recognized only process patents for pharmaceuticals. But, India being a
signatory to the WTO is also party to the Agreement on Trade Related Aspects of Intellectual
Property Rights (TRIPs). In order to honour its commitment under TRIPs, India introduced
product patents3 from January 1, 2005 through the passage of the Patents (Third Amendment)
Act in March 2005. Regarding the effect of TRIPs on prices, it is expected that the prices of
patented drugs would rise. It is true that pharmaceutical companies should be rewarded for
their efforts at research and inventions through patents, but in a country like India, the burden
of rising drug prices for the overwhelming majority of the population will be enormous given
the existing meagre facilities for healthcare and medication. Thus, the patent regime should
be such that it balances the interests of producers and consumers in a way that ultimately
enhances social welfare.
However, the immediate effect of product patents in India may be less severe than expected
since many off-patented therapeutic equivalents are available to the consumer and only about
3 percent of the drugs marketed in India are patented (Panchal, 2005). Further, many of the
3 Product patents confer on the owner the right to prevent third parties not having his consent from making,
using, offering for sale, selling or importing the product whereas process patents confer on the owner the right to prevent third parties not having his consent from using the process and from using, offering for sale, selling or importing the product obtained directly by that process.
3
currently patented drugs are likely to go off patent in the next few years, clearing the way to
follow the reverse-engineering strategy. But at the same time, new drugs would come under
patent protection and the extension of the patent period would limit the availability of
products to reverse-engineer.
R&D and Patenting Activity
There is evidence to show that R&D efforts and patenting activity have been stimulated with
the signing of TRIPs and the enforcement of stronger patent protection rights in India. Figure
1 shows the trend in patent applications filed under Section 155 of the Patents Act, 1970 from
1986-2003. These applications are filed at the national patent offices and do not include the
patents filed under the Patent Cooperation Treaty (PCT) and designated to India. The graph
shows a steep rise in both pharmaceutical as well as total patent applications after the setting
up of the WTO in 1995.
There is a fall in total patent applications after 1999 that can be attributed to India’s signing
the PCT in December 1998. Instead of filing national and international patents separately, it
is now more convenient for Indian and foreign innovators to file a single patent at an
international patent office and designate the countries in which they want to protect their
innovation including India.
Patent applications filed in the U.S. are also an important index of domestic inventive activity
and Indian firms are spending huge resources to secure non-infringing process patents in
foreign countries. After tapping the developing countries, they are trying to access developed
countries with drug master filings (DMFs) for bulk actives supply and abbreviated new drug
applications (ANDAs) for formulations.
4
Figure 1: Number of Patent Applications (other than PCT National Phase)
0
2000
4000
6000
8000
10000
12000
1986
-87
1987
-88
1988
-89
1989
-90
1990
-91
1991
-92
1992
-93
1993
-94
1994
-95
1995
-96
1996
-97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
Pharmaceuticals Total
Source: Government of India, Annual Reports of the Controller General of Patents, Designs, Trademarks and Geographical Indications, Intellectual Property, various years.
In order to make an early entry into the U.S. market for a drug going off patent, Indian firms
have filed ANDAs4 under Paragraph II and Paragraph III. They are moving up the value
chain and securing exclusivity status. Under their aggressive strategy of filing ANDAs in the
U.S. market, sales in the U.S. market started growing faster than any others (Kothari, 2003).
Table 1 lists some of the top brandname drugs, their innovator firms and sales in 2002. It is
noteworthy that of the top 10 blockbuster drugs, eight of them have Indian challengers
waiting in the wings to produce the generic versions of these drugs when their patents expire.
Firms like Ranbaxy Laboratories, Cipla and Sun Pharmaceuticals have created a pipeline of
4 The Hatch-Waxman Act provides ANDA filings for four categories:
(i) Paragraph I filing - when the required patent information is not filed by the innovator, the FDA immediately approves the ANDA.
(ii) Paragraph II filing - when the patent expires, the FDA approves the ANDA. (iii) Paragraph III filing - when the patent has not expired and the approval is sought after patent expiration. (iv) Paragraph IV filing - when the patent is invalid or will not infringe by the generic drug for which the
generic drug ANDA applicant is seeking approval. It signals the intention of the ANDA applicant to market a bioequivalent version of a brand before patent expiration on the grounds that the patent is invalid, not infringed or unenforceable. In response, a brand company has the right (if done within 45 days) to initiate patent infringement litigation to block generic entry with a 30-month stay.
5
ANDA filings to maintain their hold in the U.S. market. Paragraph IV filings are also
becoming increasingly popular among generic drug firms since the first generic applicant to
file an ANDA containing a Paragraph IV certification is eligible for 180 days of marketing
exclusivity. In fact, recently, Ranbaxy Laboratories has challenged the U.S. drug
manufacturer Pfizer regarding its patent on the blockbuster cholesterol drug Lipitor, which is
the best-selling drug in the world. If the court ruling in the U.S. favours Ranbaxy, the Indian
company will earn up to US$800 million from a generic version of the drug with exclusive
marketing rights for six months (Zamiska, 2005).
Table 1: Blockbuster Drugs and Indian Challengers
Brandname drug Innovator Sales in 2002 (US$ bn) Indian challenger(s)
Lipitor Pfizer 8.0 Ranbaxy
Zocor Merck 5.6 Ranbaxy, Biocon
Prilosec/Losec AstraZeneca 4.6 Dr Reddy’s, Cipla
Norvasc Pfizer 3.8 Dr Reddy’s, Matrix
Zyprexa Eli Lilly 3.7 Dr Reddy’s
Paxil/Seroxad GlaxoSmithKline 3.1 Dr Reddy’s
Celebrex Merck 3.0 Cipla
Zoloft Pfizer 2.7 Dr Reddy’s, Cipla
Source: Chemical and Engineering News, January 19, 2004, 82(3), pp.48-50.
For the year 2003, the Indian pharmaceutical industry filed 126 DMFs with the USFDA,
accounting for a third of the total global filings, higher than Spain, Italy, China and Israel
(OPPI, 2004). Further, India has the largest number of USFDA approved manufacturing
plants outside the U.S.
6
However, a comparison of global and Indian R&D expenditures leaves much to be desired.
While the global pharmaceutical R&D spending hovers around 10-16 percent of turnover, the
R&D expenditure (unweighted) by the Indian pharmaceutical industry as a whole is only 1.9
percent of the industry’s turnover although some research-based companies are spending over
6 percent of sales on R&D (OPPI, 2004). Thus, there is an urgent need to step up R&D
expenditure so as to compete effectively with multinational corporations (MNCs).
Market Structure
The recent WTO regulations have given an impetus to a major restructuring of corporate
strategies in the industry, with an unmistakable trend towards consolidation. The industry has
been swept by a wave of mergers and acquisitions (M&As) in its attempt to come to terms
with the new WTO dispensation. This is particularly true of the Indian affiliates of MNCs
that have formed alliances based on the mergers undertaken by their parent firms. M&As lead
to synergies by pooling resources and exploiting economies of scale.
On the flip side, small manufacturers that were dependent only on the marketing of process
innovations are likely to face survival concerns after the introduction of product patent rights
in 2005. But, even these smaller firms with low research capability have an opportunity to
gain by reorienting themselves as contract manufacturers for the large pharmaceutical MNCs,
provided they are able compete with other low-cost locations like China. On the whole, the
emerging industry dynamics point towards greater consolidation in the future. This is clear
from Figure 2, which depicts the trend in the CRs5 for the largest four and eight firms. The
graph follows a U-shape, falling from 1988-89 up to 1995-96 and then rising thereafter.
5 Concentration ratios or CRs are defined as the percentage of total industry sales contributed to the largest
few firms.
7
Thus, with the establishment of the WTO in 1995, the trend towards decentralization was
reversed in the Indian pharmaceutical industry. This is as expected since the world
pharmaceutical industry is an oligopoly investing huge amounts for R&D and as the Indian
pharmaceutical industry becomes more research-intensive, it is likely to adopt an
oligopolistic market structure.
Figure 2: Trends in CR4 and CR8
(1988-89 to 2002-03 (percent))
0
10
20
30
40
50
60
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Con
cent
ratio
n R
atio
s
CR4CR8
Source: Centre for Monitoring Indian Economy’s Prowess database.
Foreign Direct Investment
The pharmaceutical industry has been selected as one of the sunrise areas where concerted
efforts are being made to attract foreign direct investment (FDI). The Government of India
has not only abolished industrial licensing for bulk drugs, intermediates and formulations, but
has allowed automatic FDI approvals up to 100 percent foreign ownership. During 1991-
2004, the drugs and pharmaceutical sector attracted nearly Rs 35 billion in FDI inflows (see
Table 2).
8
Hitherto, the fear of not recognizing product patents in India made MNCs shy away from
comprehensive technology transfer to their Indian affiliates. Since the problem of software
piracy was brought under control in India, the software industry witnessed massive inflow of
FDI but the lack of intellectual property protection prevented the inflow of FDI in the
pharmaceutical and biotech industry. Now with the introduction of a stricter patent regime,
greater technology transfer is expected. Table 2 compares the FDI inflows into India for the
drug and pharmaceutical sector with all sectors after the liberalization of the economy in
August 1991. As is clear from Table 2, the share of the drugs and pharmaceuticals sector in
FDI inflows has more than doubled from 1.43 percent for the period 1991-99 to 3.57 percent
for the period of 2000-04. Thus, there has been a significant improvement in FDI inflows
after the year 1999, when steps were taken to amend the Patent Act 1970 for the first time.
The figure for 2004 is especially striking since it shows a marked jump in FDI, probably in
anticipation of the enforcement of product patents from January 2005 onwards.
The rise in FDI inflows can also be attributed to the expected decline in profitability of
pharmaceutical majors owing to shrinking sales growth and mounting costs. Sales growth is
shrinking as a large number of blockbuster drugs go off patent. According to one estimate, 42
of 52 blockbuster drugs amounting to US$ 82 billion in sales, will lose patent protection by
2010 (Kothari, 2003). At the same time, R&D costs are mounting due to the rising number of
tests and the period of exclusivity for a new drug is falling due to the intensified competition
in the pharmaceutical market place with me-too drugs entering the market before patent
expiration. India has an important role to play in the global division of labour by providing
the base for outsourcing to bring down costs of manufacturing and R&D through contract
research. The source of comparative advantage for the Indian pharmaceutical industry lies in
the vast pool of skilled manpower in the country. The industry has access to highly qualified
9
specialists in the fields of molecular biology, biotechnology and chemistry and that too at
very competitive costs.
Table 2: FDI Inflows into India (Rs. million)
Year Pharmaceuticals All sectors Share of pharmaceuticals (%)
Aug 1991-Dec 1999 8221.75 576821.15 1.43
2000 2079.88 123537.34 1.68
2001 4081.79 167777.54 2.43
2002 2510.52 181955.56 1.38
2003 2793.28 116171.7 2.40
2004 15711.08 172665.2 9.10
2005 5107.25 192990.9 2.64
Total 40505.55 1531920 2.64
Source: Government of India, Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Secretariat for Industrial Assistance, SIA Newsletter, various issues.
While research in Indian pharmaceutical industry has mainly focussed on the anti-infective
segment, some companies have started basic research as well. Further, MNCs have also
started using India as a base for conducting certain stages of basic research, including clinical
trials due to low costs, scientific talent and a diverse pool of patients.
Major Indian pharmaceutical firms like Ranbaxy Laboratories, Dr Reddy’s Laboratories,
Cipla, Wockhardt and Sun Pharmaceuticals have started developing strategies and
capabilities to strengthen R&D efforts. These firms have benefited patients in India and many
poor countries by providing them access to affordable drugs and treatments. Witness the case
of the fall in prices of antiretroviral AIDS drugs from nearly US$10,000-12,000 per patient
per year to US$350 for ‘Doctors without Borders’ and US$600 for governments, thanks to
10
the development of the “cocktail” therapy of three drugs developed by Cipla (Zimmerman
and Pesta, 2001).
The Indian pharmaceutical industry is also increasingly complying with good manufacturing
practices (GMP)6 and investing in R&D for diseases like malaria and tuberculosis that are
peculiar to tropical countries. Further, for greater market access, Indian companies have
started acquiring foreign firms. A study of some of the major pharmaceutical companies’
annual reports showed the following foreign acquisitions: Ranbaxy acquired Ohm
Laboratories of the U.S. in 1995 and RPG Aventis of France in 2004 for over US$80 million;
Sun Pharmaceuticals acquired Caraco of the U.S. in 1997 and increased its stakes further in
2003; Wockhardt acquired Wallis of the U.K. in 1998; Dr Reddy’s Laboratories acquired
BMS of the U.K. in 2002 and Trigenesis of the U.S. in 2004.
Exports
The rising exports of Indian pharmaceutical manufacturers are an indicator of local
technological capability, particularly in process innovations. With their cost-effective process
innovations and reverse-engineering of brandname drugs, Indian firms have emerged as
competitive suppliers in the world for a large number of generic drugs. Moreover, since least
developed countries have an additional 10 years to provide product patents after 2005, Indian
firms can continue to service the markets in these 49 countries till 2016 by setting up
manufacturing bases for on-patent drugs in these countries.
A revealed comparative advantage index considers the intrinsic advantage of a particular
export commodity in world markets. Balassa’s index of revealed comparative advantage 6 GMP refers to the Good Manufacturing Practices Regulations of the USFDA that require the manufacturers,
processors and packagers of pharmaceuticals to ensure that their manufacturing processes are safe, pure and devoid of contamination.
11
(BRCA) compares the export share of a given sector in a country with the export share of that
sector in the world market (Balassa, 1965,1979 and 1986). However, this index cannot
distinguish between improvements in factor endowments and pursuit of appropriate trade
policies. Vollrath’s index of revealed comparative advantage (VRCA) takes into account both
the significance of a country’s export in a given sector and that country’s total export in the
world market (Vollrath, 1991). The BRCA and VCRA are calculated as follows:
⎪⎭
⎪⎬
⎫
⎪⎩
⎪⎨
⎧
⎪⎭
⎪⎬
⎫
⎪⎩
⎪⎨
⎧
=
∑∑∑
∑
j iij
iij
jij
ij
ij
X
X
XX
BRCA
⎪⎪
⎭
⎪⎪
⎬
⎫
⎪⎪
⎩
⎪⎪
⎨
⎧
⎟⎠
⎞⎜⎝
⎛−−⎟⎟
⎠
⎞⎜⎜⎝
⎛−
−
⎪⎭
⎪⎬
⎫
⎪⎩
⎪⎨
⎧
−=
∑∑∑ ∑
∑
∑
iijij
j i jijij
jijij
iijij
ij
ij
XXXX
XX
XXX
VRCA
where Xij is the exports of sector i from country j, ΣXij is the total exports of country j, ΣXij
is the world exports of sector i and Σ ΣXij are the total world exports.
Table 3 computes the Balassa’s index of revealed comparative advantage (BRCA) and
Vollrath’s index of revealed comparative advantage (VRCA) for Indian pharmaceutical
exports and finds that both the indices are quite high being greater than unity for all the years.
Thus, India has a comparative advantage in pharmaceutical exports due to its known ability
for low-cost reverse-engineering of brandname drugs to produce generic drugs. Despite this
12
proven comparative advantage, Indian pharmaceutical exports contribute a negligible share to
world pharmaceutical exports, hovering around 1 percent of world pharmaceutical exports
(Table 3). Further, exports of generics from India are likely to face competition from other
countries, particularly for generic drugs whose market is highly price sensitive. Some of
India’s main competitors include China, South Korea, Taiwan and Brazil. Thus, to face this
competition successfully, Indian pharmaceutical firms will have to intensify R&D efforts and
improve efficiency.
Table 3: Comparative Advantage of Indian Exports of Medicinal and
Pharmaceutical Products (SITC 541)
Indian pharma exports (US$ mn)
Total Indian exports (US$ mn)
Share of pharma exports in total Indian exports (%)
World pharma exports
Share of India in world pharma exports (%)
Balassa’s RCA Index
Vollrath’s RCA Index
1992 431.2 19641 2.20 49829.4 0.87 1.63 1.65
1993 482.9 21573 2.24 51778.6 0.93 1.60 1.63
1994 585.8 25022 2.34 59723.7 0.98 1.66 1.68
1995 724.2 30628 2.36 71997.5 1.00 1.61 1.63
1996 814 33107 2.46 77833.9 1.04 1.62 1.64
1997 947.2 35006 2.71 83616.9 1.13 1.71 1.74
1998 933.7 33463 2.79 94572.1 0.98 1.54 1.56
1999 1068.2 35666 2.99 104870.4 1.02 1.55 1.57
2000 1255.2 42378 2.96 107481.7 1.17 1.67 1.69
2001 1348.2 43338 3.11 132797 1.02 1.36 1.38
2002 1760 49293 3.56 151861.6 1.16 1.43 1.45
Source: United Nations, International Trade Statistics Yearbook, various years.
13
Conclusion
The twin dose of economic liberalization and strong patent regime has rejuvenated the Indian
pharmaceutical industry. The export focus of Indian firms, propelled by the recognition of
process patents in different countries, has made them penetrate a number of countries based
on their low cost structure. They are now concentrating not only on off-patent drugs but also
on undertaking contract research. The pharmaceutical industry is in the transition phase ready
to face new challenges that could bring major changes in its business environment. For long-
term solutions, the industry will have to build up its R&D facilities as well as make sustained
efforts to attract FDI for technical collaborations. Moreover, it is imperative that the
deregulation and decontrol of the industry should proceed in such a manner that prices of
essential drugs remain affordable to consumers since this industry has direct implications for
healthcare and social welfare. But, with stronger patent laws, contract research, joint ventures
and clinical trials at a fraction of the cost in India as compared to developed countries, India
is the right choice for pharmaceutical FDI in the near term.
References
Balassa, B. (1965). ‘Trade Liberalization and “Revealed” Comparative Advantage’, Manchester School of Economic and Social Studies, 33, 99-123. Balassa, B. (1979). ‘The Changing Pattern of Comparative Advantage in Manufactured Goods’, Review of Economics and Statistics, 61, 259-266. Balassa, B. (1986). ‘Comparative Advantage in Manufactured Goods: A Reappraisal’, Review of Economics and Statistics, 68, 315-319. Commercial Law Publishers (2003), The Patents Act, 1970, Commercial Law Publishers, Delhi. Economic Survey (2004-05), Ministry of Finance, Government of India, New Delhi, India. Kothari, A. (2003), ‘Facets of Indian Pharma R&D’, India Equity Research, Paper presented at Mumbai, April 2003.
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Organization of Pharmaceutical Producers of India (OPPI) (2004), ‘Fact Sheet 2003’, Pharmaceutical Industry in India. Panchal, S. (2005), ‘Patents Era: How will Pharma Firms Cope’? www.rediff.com, April 7, 2005. Vollrath, T. L. (1991). ‘A Theoretical Evaluation of Alternative Trade Intensity Measures of Revealed Comparative Advantage’, Weltwirtschaftliches Archiv, 127, 264-279. Zimmerman, R. and J. Pesta (2001), ‘Drug Industry, AIDS Community is Jolted by Cipla AIDS-Drug Offer’, The Wall Street Journal, February 8, 2001.
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